Power to the people

Well, plenty of people were saying that would happen back in the 1990s when National insisted on giving it a go. They split up the ECNZ into four bite size pieces to compete against each other. They planned to sell them all and create a totally private electricity market but only had time to flog off Contact before they lost power.

Since then we’ve had to deal with this dumb monopolistic system that’s mostly public-owned but doesn’t act in the public interest. Labour’s best effort to fix it was the Electricity Commission – a half-hearted effort to stop the generator/retailers from taking super-profits by regulating the market.

It didn’t work. We didn’t get enough generation and transmission as we needed put in. The government couldn’t get its own SOEs to follow its climate change policies; they act like profit-maximising corporates instead. Trying to use price to destroy demand during dry years just led to politically untenable profits flowing to Contact’s shareholders and the government.

National is now acting all angry at the electricity companies and warning them not to increase prices any further. This just months after they demanded bigger profits from those same SOEs.

National’s solution is to get rid of the Electricity Commission and break up the SOEs into smaller SOEs ready for selling. That wouldn’t create a better market. You don’t get good markets in natural monopolies. It wouldn’t lead to cheaper power having more companies trying to sell you an identical product just leads to them spending more on advertising. It would leave one huge company, Contact, to play NZ’s version of Enron in California. You might think that we would have learned that unregulated capitalists don’t always act in the public interest over the last couple of years but it seems National hasn’t.

The real solution is to get rid of this whole sham. Buy back Contact (work out a fair share price and do it through legislation). Put the whole thing back into one and set it some simple goals: reliable supply at a steady, low price and phasing out fossil fuels. Don’t worry about profits. Even now, profits are basically just an electricity tax.

Forget the neoliberal daydream of a real electricity market. Get back to having an electricity system that’s just about giving us cheap, green power when we want it.

Now lets blame the Electricity Sector – and of course it’s all Nationals fault. Yesterday this blog blamed the the CEO’s and businesses.
Whose next to blame? You’re running out of targets.

Buying back Contact Energy is not the answer, firstly we’ve got no money to do that at the moment. Adjust the system maybe the answer – allow the lines companies to retail and generate and create more competition in the network for consumers

Often makes me wonder why the govt hasn’t done something similar with the banking sector . why does all the IRD business still go through Westpac rather than Kiwibank ?

Because Treasury is still worshipping the neo-liberal demi-god of “Efficiency”. If you discount all of the externalities to zero, then it’s more “efficient” for IRD to save 0.1 cents per transaction by going with Westpac’s lower contract price.

In Treasury’s world, keeping jobs in New Zealand, not exporting the bank profits, building New Zealand’s capital base and all the other benefits that would come from keeping government business on-shore aren’t actually counted. Hence the Westpac decision.

If you go and have a look around the Chief Executive positions in the public sector, you’ll discover that a non-trivial percentage of the incumbents are ex-Treasury, which is why this anti-logic seems so pervasive.

Ok Bilbo
The dividends that are received from the SOE’s go back into the Govt coffers for other programs (Police, roading, social spending). You take that away and the shortfall has to come from somewhere else. Oh that’s right, just tax the “Rich” to make up the difference.

Are you serious? If the electricity companies hadn’t been systematically raping their customers, there would be another $4 billion in income sloshing around inside NZ. And remember, one of the biggest players is Contact, which is predominantly owned by offshore investors – pray tell how the investors who have been banking the dividend cheques into overseas bank accounts help pay for the Police, roading and social spending.

Contact is a public company so different situation. But they invest money building generation facilities, that contibutes to the economy with jobs, etc.

That’s a truly lame response.

Contact have 24% of the generating market, according to MED. If the gaming of the market has been happening on a pro-rata basis, this means that Contact are guilty of pulling an additional $960 million out of New Zealand, which has benefited predominantly overseas shareholders.

We could have used a public project to build the same generation facilities and created the same number of jobs as Contact did, and the only effect would be that New Zealanders would be $960 million richer!

Lots. probably most of the amount alleged to be overcharged found its way into the Labour Government’s coffers. It’s certainly on record they got more than a billion out of Meridian for the last two election year budgets.

It’s rather unlikely that National is going to engage in such a draconian anti business course of action, they have no political constituency like Labour does with the leftist unionists.

You can’t have competition in electricity supply. You can only have one network because it’s far too expensive to have more than one. Having multiple suppliers increases costs because of the increased bureaucracy and laws. The cost of setting up the competition prevents the competition even trying.

Do what you say and we will end up with a privately owned monopoly gouging society and not enough power generation. Exactly why Milton Friedman said in Capitalism & Freedom that if you have to have a monopoly then it should be state owned.

Power is an infrastructural component of society like roads and as such it needs to be state owned. Without it society would be worse off. If the generation and reticulation of power loses money then it can easily be, and should be, regarded as an investment in our society.

We have more or less the same in the past because of the state monopoly. A monopoly is a monopoly regardless. That’s why we have laws against monopolies, except of course government ones, and that’s where you have made a huge mistake in your post. The electrical supply network is owned by an independent public entity and that’s the only monopoly that should be tolerated. There’s no case for generation monopoly because it happens at multiple sites. There’s no case at all that going back to an NZED scenario with the local distribution monopolised by MEDs is going to produce an improvement over the current situation. There’s plenty of case that limiting the monopoly power of major players is going to produce real improvement. The situation is that the government owns most of the generation capacity and thus has substantial market power, Further, the government can buy political power as a result. Going back to the past NZED-MED type model will simply cement in the most negative aspects of the current situation.

Yes very good post Eddie. I was listening to Gerry Brownlee being interviewed on National Radio yesterday evening and I could feel his pain in having to admit that the market solution – Max Bradford’s baby – had been a complete failure.

Surely though one of the lessons of this is that the constant right wing screeching for personal tax cuts will lead to politically driven and undesirable distortions of the tax system. Make no mistake – the government cannot dare raise personal taxation given the way the cheerleaders of the business elites react to such a thing, so instead it is forced to indulge in this sort of unfair and distorting taxation in order to maintain the revenue streams that pay for everything. Right wingers don’t understand there is no such as a free lunch. Or rather, they seem happy to accept that they may have to step over begging old ladies on wintry streets on their way to collect their tax cut.

The sooner we up the top personal tax rates to the top tiers of earners – and corporates – and cut these sort of unfair and hidden tax burdens on the poorest New Zealanders the better.

Having the highest personal tax bracket not consistent with that of companies, trusts and other corporate bodies has led to massive undesirable distortions in the tax system.

Yes, you’re entirely correct – if you can game the tax system by running your income through a company or a trust, then you can pay significantly less tax than anyone stuck on PAYE.

However this is not normally an option for families on the minimum wage in South Auckland, so effectively provides a mechanism for richer folk to pay less tax than is equitable.

The solution to this problem is to normalise the tax system, by making all top rates the same. This can just as easily be done by raising trust and company taxes as lowering personal taxes. No prizes for guessing which one will result in a lower deficit.

Repeating the hackneyed pre-election drivel and screeches for “tax cuts” puts you way behind even your own sunny leader. So last year.

The vote-buying “north of $50/wk” bribe won the election but is now old hat: the reality-forced chewing gum for the rich and zip for the majority (morphing into zip for all henceforth) has taken it off the Keyspeak register for good.

I’m not “screeching” for a cut in taxation revenue at all and never said anything close to that dickhead.

If anything I would look to rebalance to tax take through capital gains on investment property (aside from the primary home of residence) and those who think they are so smart clipping the property ticket. That would include capital gains on all goods – including Art and collectables memorabilia. And one you’ll all love, I’m sure, I would remove subjective references to “traders” when it comes to taxing capital gains on shares – all trading of shares would be subject to capital gains.

It’s my belief that a capital gains isn’t quite as tough a pill to swallow politically as it’s made out to be and it would align us with most other developed nations…. even those without “Tory” leaders.

Yes, I would also increase GST also (so start preparing your vitriol now). Increasing the cost of consumption will encourage an increase savings (the great panacea to our current account deficit according to Labour).

These two measures would help us lower personal taxes to a level consistent with that of companies and trusts and remove the distortion currently. I trust that the current tax think tank appointed will do justice to these suggestions… thank heavens they have a bit more knowledge and sense when it comes to taxation than you lot.

ANOTHER POINT…
“so effectively provides a mechanism for richer folk to pay less tax than is equitable”

Who is you to decide what is “equitable”…. Is it “equitable” that those who provide the jobs and risk the capital be summarily punished for doing so?

“However this is not normally an option for families on the minimum wage in South Auckland”… If they had the access to the knowledge why would a family on the minimum wage need to exercise that option anyway?… presumably their marginal tax rate is less than that of a company or trust in any case.

As an aside how can discussion about the structure of the tax system be “so last year” when the government has only just appointed a think tank, that includes New Zealand’s foremost experts on taxation (including members from each of the Big 4 accounting firms) to provide suggestions for reform?

How can you be so sure this won’t radically change the current structure and that parties will change their stance given these recommendations?

Pretty ballsy of you I would suggest… or is it just another example of the supreme arrogance of the left again thinking they know better than the experts?

Labour’s best effort to fix it was the Electricity Commission – a half-hearted effort to stop the generator/retailers from taking super-profits by regulating the market.

It didn’t work. We didn’t get enough generation and transmission as we needed put in.

These two statements are mutually contradictory. Transmission price rises are justified as the recovery of costs spent on transmission investment. The EC approval system for investment is designed to STOP unnecessary investment that will drive up cost. Similar logic applies to generation investment.

Now you can agree or disagree with whether or not more investment than is current approved is needed (althought the NZ transmission system is actually fairly reliable by international standards, I might add), but more investment will = higher electricity prices. Either that, or direct subsidy of the electricity companies from the general tax base. Again, you might think that’s a good idea. But more investment = more costs. It’s very difficult to rationally demand BOTH more investment AND lower prices.

Actually, it’s not all that difficult at all but it doesn’t work for private investors as they are looking for the return of the original investment plus profit. Works fine for state ownership though as the cost of setting up new generation is taken out taxes as a sunk cost with no direct return needed or even looked for. The price of power would then be the cost of supply and maintenance. The returns that we would get would be the increased efficiencies and living standards of our society which are almost impossible to quantify but would be greater than zero.

The cost isn’t zero either though. You either have to pay back the cost of the investment (paying for it is independent of the profit motive) through electricity charges or out of general taxes.

Generation and transmission capacity costs money. You might pay less for it in the long run in public ownership (I think that is likely), but you still have to pay for it. I’m not arguing that private ownership is more efficient than public in the electricity sector, I’m arguing that you have to pay for investment somehow, and therefore Eddie’s point doesn’t really make sense. I wouldn’ve thought that’s relatively uncontroversial.

LawGeek is exactly right. More investment equals higher charges. Fundamentally becasue there is no game changing technology that lowers the cost base. Most of the green energy is more expensive not less, so you are contradicting yourself.

What you are arguing for is short run marginal cost. Possibly fine if you have static supply and demand. Alternatively a highly competitive market with very low barriers to entry would get close.

But how would you incentivise the building of supplementary new plant to meet rising demand unless you do that by ministerial direction or some other centralised planner where the taxpayer wears the risk if it is wrong (and we have plenty of excruciatingly bad examples of that in the recent and distant past – wanna buy a railway anyone? A synfuel plant?). Your proposal to hide it in general taxes is frankly scary and likely to lead to overbuilding due to lack of accountability for decisions. I’d suggest it would be the least efficient.

Having a market shifts the risk from taxpayers to investors. It also means that we are not subject to the whim of central planners and politicians who decide what is best for us. They will use that power to steamroller over communities because it looks good in an engineering sense but probably only from that perspective, or politically good, which usually means expensive for you and me. What we need is more market not less, and more scrutiny of that market

But how would you incentivise the building of supplementary new plant to meet rising demand unless you do that by ministerial direction or some other centralised planner where the taxpayer wears the risk if it is wrong (and we have plenty of excruciatingly bad examples of that in the recent and distant past – wanna buy a railway anyone? A synfuel plant?).

Having a market shifts the risk from taxpayers to investors.

And we have even more proving that the market doesn’t move the risks from the public to the private. If the infrastructure isn’t built then the public pays in lost living standards, lost earnings and other ways.

The market will never over build but doing so isn’t actually a failure – it just means you can put off further investment longer but the profits will either be low or non-existent. So, the market is incentivised to under invest to keep prices and profits high in the short term while the state is incentivised to over invest to keep costs down in the long term. Central planning for a single service that is so integral for the wellbeing of society is a massive improvement over market supply of the same service.

Your proposal to hide it in general taxes…

Don’t put words in my mouth. I never said to hide it in the taxes and there’s no way I would support any sort of black project that funded through taxes. Pay for it through taxes as an investment in society is what I said and what it actually is.

I didn’t say it would cost nothing. I said that the difference is that private investors want their money back and that government can regard the investment as a sunk cost and not expect it back at all. This will lower electricity prices because all that they are covering is maintenance.

Actually no, the Government requires a return on its assets and are pretty harsh in demanding it – and there are good reasons for this. It needs to know when investment is efficient or inefficient just as much as any private business or else the costs could spiral – they would only feel like they are small because they are hidden and you can’t blame some fat cat.

Re the above (system won’t let me reply to it directly for some reason)

“And we have even more proving that the market doesn’t move the risks from the public to the private. If the infrastructure isn’t built then the public pays in lost living standards, lost earnings and other ways.”

Actually we don’t have that proof. Firstly we have over 4000MW of generation planned – that is 50% of total installed capacity and we are only growing demand at ~2%pa. There have been significant investments since the market was developed.

Secondly, we have had fewer actual power cuts due to energy shortages than we did under centralised planning. Centralised planning leads to pork barreling IMO o

Power plants cost millions to build. That’s millions of tax dollars that can’t go somewhere else. Either that, or the power company has to cover the costs of its investment through electricity charges. I agree that if the power company is state-owned, there is the possibility for including a lower profit component in those charges. But even if you’re going for break even, which we surely want our Government to do, new investment = new cost = higher charges.

Are you are saying that the price gouging over the last 6 years is the fault of National from the 90’s rather than Labour who were in charge over the last 6 years?

Following this logic Fyffe is indemnified for the Zear360 situation as the problems stem back to the govt when they set up Air NZ in the first place. Going right back to NAC would follow the same logic as blaming National for this.

Come on Eddie, the directors, shareholders and management team are responsible for stuff that happens on their watch. You cannot continue to blame the National govt of the 90’s for ever Eddie

Speaking on Radio New Zealand Mr Brownlee said refunds were not an option. He pointed out the report looked at the wholesale not the retail market, but also it was too difficult.

“Most of this happened in the past, it happened over the seven years up to 2007,” he said.

“The 2008 year hasn’t been part of the assessment. . .you’ve got to remember to that the household sector is just on a third of all electricity use so it becomes very, very difficult to work out who actually has paid for what.”

So let’s get this straight. The electricity companies have the billing systems that allow them to buy and sell through individual transactions in the wholesale and retail markets, and a regulatory obligations to keep those records for a decade. But it’s “too difficult” to go back through those same records and correct the over-charging, despite the fact that the Commerce Commission has forced exactly the same process on other large-scale corporates that have been guilty of over-charging on transaction fees, such as the recent example of the banks with credit card transactions.

The only sense in which this is “difficult” is that it would cost pro-privatisation Brownlee some political capital.

What has happened is that a theoretical model has been built that says in an ideal market if all the conditions in the model were fully conformed with, prices should have been at level X most of teh time, but when he looked at the actual prices they were X+. That gap has been considered an “overcharge” but there is significant debate over whether the model can ever be “true” ie can that ideal ever be achieved in any market ever, meaning the theoretical base could be just that, a theory.

There are also people questioning whether the model actually effectively replicates the NZ market.

Insider, if I understand correctly, it would be very easy to figure out who creamed what from whom when.

The key point is that the highest spot price determines the overall market wholesale price.

The easiest example to use is that during a dry year, there is not enough hydro, so we burn diesel. This means we are paying for hydro power as if it were diesel. To find out the overcharging, merely determine when the spot prices are for each generation type and unit, and then if the price was ever above that.

Lets consider your premise of repurchasing Contact Energy, so that ECNZ can be reconstituted. Right now, Contact Energy has a market capitalisation of $3.4 billion (source: http://www.nzx.com/markets/NZSX/CEN). This would have to be the starting price of any fair value for the business (a lot more than Cullen’s woefully overpaid train set – my god, I would hate to see him negotiate this deal!)

Would the reorganisation of the market produce $3.4b in benefit? Arguably, it would have prevented the $4b in overcharging that has just occurred… but nevertheless, it is a hell of a cost.

… which by your own figures would produce a return of $600 million in net economic welfare for New Zealand. To do the numbers, that’s a 17% ROI, not allowing for the time value of the money invested. There’s clearly a very good prima facie business case for doing an immediate re-purchase; I’d suggest a full NPV assessment as a good beginning point, but it seems like a very workable deal.

Theres not much needs to be said after Pascals missive, its right on the money. The whole market concept for utilities is totally flawed, and an exercise in the gathering of safe returns for those that have the money to invest. Which in itself means that the rest of us will have to return a “rental” to these shareholders. They in turn will demand more and more. Time to nationalise.

In terms of shareholders and investment capital I would encourage high returns if the risk is commensurate, but in the case of existant captive markets there is no real risk. And that is what is so bloody sick, no one with money is inclined to risk it, they only want safe returns from you and me. Its a form of parasitism and it aims at the capture of the common good for the private gain.

You are almost correct, it is the supply bid that clears the demand that sets teh price. So like an auction people will offer generation at various prices for a set demand. Those offers are stacked on top of each other from lowest to highest. When you get to the point that meets demand, the market is cleared and it is that marginal offer that sets the price that everyone receives even if their offer was lower. So the highest offer is not necessarily accepted. That would only happen when the generation offered exactly matches demand, which is almost never.

The problem with your solution is that it disincentivses me to offer my generation at near marginal cost, because if I get paid more – which I have no control over – you might sting me down the track. That is absurd and unfair. The only person who should wear that is the marginal generator, but how are they to know they are going to be at the margin? No-one has perfect information and no-one could accurately guess when they were at the margin. It also requires anyone reviewing the market to be perfectly informed about what was bid and why, and what the marginal costs were. And that is really really hard I suspect.

Like I said, a theoretical view has become reality and it may not actually be so.

What we need to have is a computer model that optimises which power stations run to minimise CO2 emissions over an annual cycle, while maintaining a reserve of water in case of dry or calm weather.

The cost of (state-generated) electricity then becomes the cost of generators (fuel, capital, maintenance, overheads) plus a reasonable surplus. Contact and any other privately-held generators can either be paid on the same basis, or can sell power through their own distribution network to any private customers that want to contract with them.

As well as this, it would make sense to turn the state generators from SOEs into worker/consumer owned cooperatives, so that any profits flow straight back to the customers and workers.

what on earth is a worker/consumer cooperative going to give that an SOE isnt? both return money to the public – just that the former introduces a whole pile of CRAZY along the way.

I assure you, as a tax payer, i am not going to let one shred of my publicly owned power generation fall into the private hands of the “workers”. i thought you lot hated privatisation – what the hell is this?

The Baron – What is your particular problem with consumer or worker cooperatives? Merely saying something is crazy is not a substative argument. Are you capable of providing a good argument against these models? What is the crazy you talk of? Is it merely that it smells of leftism to you so ipso facto it must be bad – no argument needed.
I don’t hate privatisation. It is how privatisation is carried out that is the problem. There are many different ways to privatise. Most people don’t have such a black and white picture of the world as you. Market – anti-market, privatisation – state ownership, black – white…

I assure you, as a tax payer, i am not going to let one shred of my publicly owned power generation fall into the private hands of the “workers’.
…so you have a problem with it being in the private hands of workers, but you have no problem with it being in the private hands of corporates, or not?

And on the second, you caught a fair error of mine. I absolutely have no problem with worker ownership of anything – so long as they purchase the asset at fair market value. In fact, I think it would be a beautiful model if more workers did get the capital together and do just that, and actually demonstrate the model to the country.

I suspect that Rich had something wholly different in mind however, in that he wanted the Government to give the power assets over to worker/consumer control as an alternative to SOE structures. It was that concept that i was railing against, as it privatises the asset without fair recourse to the owners – the collective taxpayers.

as for your last sentence, i think you have wholly made that up. i don’t think i have ever made any statement for or against privatisation? i share however your own sentiments that you express earlier.

What you describe is similar to what we have. The system runs on best price first. The ETS or carbon tax was supposed to penalise carbon so pushing carbon dioxide production down the bidding order. But we can’t meet demand with just renewables so need fossil fuels. So any increase to FF costs is a direct cost increase to power purchasers. Not only that, wind tends to be more expensive than gas at present so there is a double whammy.

The period under review happens to be entirely a period when Labour was in government and therefore received the control of the billions of dollars into government coffers which they were then able to spend on scratching their usual itches.

It was most noticeable that Labour ministers at the time when these electricity price rises were taking place, kept very quiet on the subject of where the money was going to. Labour of course did almost nothing to change the electricity marketplace during that time.

Hardly surprising is it? In 2005, Labour makes certain spending promises in the election campaign. Michael Cullen contrives to extract about a billion dollars from Meridian to pay for some of those promises. That amount being in addition to the normal dividends that are paid out each year to the government as shareholders.

Just tell us whether you still believe that the billions in overcharging was bad, that Labour should have given that money back in rebates.

I don’t know why anyone thinks there is some sort of “good old days” when power was not being overcharged. Before Bradford came along and did his bit, things were pretty much the same, the main difference being that the NZED was run like a typical government department rather than the SOE model.

There was no choice for the public who they could buy power from, the MEDs used to transfer large sums of money to local government coffers each year such that special legislation was put through by Muldoon to limit the amounts. These things happen when you have a government monopoly.

What you have missed out here is that the government still owns most of the SOEs implicated in this cartel and therefore has substantial market power. All you need is an SOE minister to tell all three to behave the same way and there is that cartel at work with the resulting outcome.

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Policy Quarterly has just published papers from a symposium on distributional inequality held last June. There are really interesting papers by Geoff Bertram, Phillip Morrison, Bill Rosenberg and Simon Chapple et al which you may want to read for yourself.read&hellip; ...

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Tony Abbott's visit to New Zealand gave Australian political commentators another excuse to highlight the failings of his leadership, by comparing him with John Key. However, their list of John Key's successes is a little... odd:Key has, with a minimum… ...

The fight against Islamic State is not the fight of the oppressor against the disposed and the poor. Its leaders and disciples are mostly educated and middle class, if not wealthy. It’s the victims in Iraq and Syria who are the poor.read more ...

Guest Post from Ryan Mearns, Generation Zero Auckland For nearly 50 years from the early 1950’s Auckland invested solely in roads, and especially motorways, with all other transport modes being totally ignored. This one sided level of investment was not… ...

by Michael Roberts Recently Noah Smith pointed out that “Modern macro-economists think that recessions and booms are random fluctuations around a trend. These fluctuations tend to die out — a deep recession leads to a fast recovery, and a big expansion tends… ...

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